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Governance Indicators WPS4370 POLICY RESEARCH WORKING PAPER 4370 Public Disclosure Authorized Governance Indicators: Where Are We, Where Should We Be Going? Public Disclosure Authorized Daniel Kaufmann Aart Kraay Public Disclosure Authorized The World Bank World Bank Institute Public Disclosure Authorized Global Governance Group and Development Research Group Macroeconomics and Growth Team POLICY RESEARCH WORKING PAPER 4370 Abstract Scholars, policymakers, aid donors, and aid recipients between experts and survey respondents on whose views acknowledge the importance of good governance for governance assessments are based, again highlighting development. This understanding has spurred an intense their advantages, disadvantages, and complementarities. interest in more refined, nuanced, and policy-relevant We also review the merits of aggregate as opposed to indicators of governance. In this paper we review progress individual governance indicators. We conclude with some to date in the area of measuring governance, using simple principles to guide the refinement of existing a simple framework of analysis focusing on two key governance indicators and the development of future questions: (i) what do we measure? and, (ii) whose views indicators. We emphasize the need to: transparently do we rely on? For the former question, we distinguish disclose and account for the margins of error in all between indicators measuring formal laws or rules 'on indicators; draw from a diversity of indicators and exploit the books', and indicators that measure the practical complementarities among them; submit all indicators to application or outcomes of these rules 'on the ground', rigorous public and academic scrutiny; and, in light of calling attention to the strengths and weaknesses of the lessons of over a decade of existing indicators, to be both types of indicators as well as the complementarities realistic in the expectations of future indicators. between them. For the latter question, we distinguish This paper—a joint product of the Global Governance Group, World Bank Institute, and the Macroeconomics and Growth Team, Development Research Group—is part of a larger effort in the Bank to study governance. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at dkaufmann@ worldbank.org, [email protected]. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team Governance Indicators: Where Are We, Where Should We Be Going? Daniel Kaufmann Aart Kraay The World Bank _____________________________________ 1818 H Street N.W., Washington, DC 20433, [email protected], [email protected]. We would like to thank Shanta Devarajan for encouraging us to write this survey for the World Bank Research Observer, three anonymous referees for their helpful comments, and Massimo Mastruzzi for assistance. The views expressed here are the authors' and do not necessarily reflect those of the World Bank, its Executive Directors, or the countries they represent. "Not everything that can be counted counts, and not everything that counts can be counted" Albert Einstein 1. Introduction Most scholars, policymakers, aid donors, and aid recipients recognize that good governance is a fundamental ingredient of sustained economic development. This growing understanding, which was initially informed by a very limited set of empirical measures of governance, has spurred an intense interest in developing more refined, nuanced, and policy-relevant indicators of governance. In this paper we review progress to date in the area of measuring governance, emphasizing empirical measures that are explicitly designed to be comparable across countries, and in most cases, over time as well. Our goal here is to provide a structure for thinking about the strengths and weaknesses of different types of governance indicators that can inform ongoing efforts to improve existing measures and develop new ones.1 We begin in Section 2 by reviewing some of the alternative definitions of governance, as a necessary first step towards measurement. Although there are many broad definitions of governance in circulation, the degree of definitional disagreement can easily be overstated. Most definitions appropriately emphasize the importance of a capable state, accountable to its citizens and operating under the rule of law. Broad principles of governance along these lines are naturally not amenable to direct observation and thus to direct measurement: as the first part of the quote from Albert Einstein reminds us, "not everything that counts can be counted". However as we document below there are many different types of data that are informative of the extent to which these principles of governance are observed across countries. An important corollary is that any particular indicator of governance can usefully be interpreted as a noisy, or imperfect proxy for some unobserved broad dimension of governance. This interpretation emphasizes a recurrent theme throughout this review -- that there is 1 We do not provide a great deal of detail on each of the many existing indicators of governance. All of the measures we discuss have been competently described by their producers, several have attracted their own written critiques and discussions, and there are already a number of existing surveys and user guides to the body of existing governance indicators. See for example Arndt and Oman (2006), Knack (2006), UNDP (2005), and Chapter 5 of World Bank (2006). Due to space constraints we also do not attempt to review the very important body of work focused on in-depth within-country diagnostic measures of governance that are not designed for cross-country replicability and comparisons. 2 measurement error in all governance indicators. This measurement error should be explicitly considered when using this kind of data to draw conclusions about cross- country differences or trends over time in governance. We organize our discussion in Sections 3 and 4 around a simple taxonomy of existing governance indicators, summarized in Table 1. The first dimension of our taxonomy captures varying answers to the question "What do we measure?", that we take up in Section 3. We highlight the distinction between indicators that measure the existence of specific laws or rules 'on the books', and indicators that measure particular governance outcomes 'on the ground'. The former codifies details of the constitutional, legal or regulatory environment, the existence or absence of specific agencies such as anticorruption commissions or independent auditors, etc., that are intended to provide the key de jure foundations of governance. The latter are indicators that measure de facto governance outcomes that result from the of the application of these rules: for example, do firms find the regulatory environment cumbersome?, do households believe the police are corrupt?, etc.. An important message in this section concerns the shared limitations of indicators of both rules and outcomes: outcome-based indicators of governance can be difficult to link back to specific policy interventions, and conversely, the links from easy-to-measure de jure indicators of rules to governance outcomes of interest are in many cases not yet well-understood, and in some cases appear tenuous at best. The second part of the Einstein quote reminds us of the need for modesty in this respect: "not everything that can be counted counts". The other dimension of our taxonomy corresponds to varying answers to the question "Whose views do we rely on?", that we take up in Section 4. We distinguish between indicators based on the views of various types of experts, and those survey- based indicators that capture the views of large samples of firms and individuals. In addition we identify a category of aggregate indicators that combine, organize, and summarize information from these different types of respondents. Section 5 of the paper is devoted to discussing the rationale for, and strengths and weaknesses of, such aggregate indicators. The entries in Table 1 are a selection of existing governance indicators that we discuss throughout the paper. The table entries are not intended to be exhaustive of the 3 stock of existing governance indicators, but rather as leading examples of major indicators in this taxonomy.2 A striking feature of efforts to measure governance to date is the preponderance of indicators focused on measuring various de facto governance outcomes, contrasting the relative few which measure de jure rules. Almost by necessity, the latter type of rules-based indicators of governance reflects the views or judgments of experts in the relevant areas. In contrast, the much larger body of de facto indicators captures the views both of experts as well as survey respondents of various types. We conclude in Section 6 with a discussion of the way forward with
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